Its a place undefined in time, a location that no one would ever willingly travel to. Are we there yet? The answer is yes. But its going to take 7 to 8 years for the reality to sink in.

Friday, July 03, 2009

The Funnel Effect (Reprint Feb 2007)

People are waiting for real estate to fall flat, and there is going to be a long wait. Not that it won’t happen, it’s almost a certainty that it will. But by the time it does come to fruition, it will be a moot point.

Here is a concept, let's call it the "Funnel Effect." Individual items drop into the funnel and combine with others. As they drop through this funnel as a group, they become more concentrated.

The easiest way to view the funnel effect is from bad housing loans, Visa and Master Card accounts. If you are a credit card company or a real estate lender, these problems are quite apparent; they could have hundreds if not thousands of people in a distressed state. This funneling effect of each individual, demonstrates what happens higher up in the retail/wholesale chain. We have consumers all over the world that purchase goods and carry on with their lives. When the economy starts to go bad, we have a situation where many people cannot manage to live in their accustomed manner and cut back on consumption in some form or manner.

Using a Starbucks Coffee Shop or Home Depot, the Funnel Effect (lack of consumption) would be reflected as a drop in sales. Individuals decide to spend less or not pay for an item like real estate taxes. Notice, that these choices of not to consume or pay a bill, converge into a group category. Housing funnels into lenders who made the loan. Bankruptcy’s funnel into credit card losses for the card issuer. The real estate tax base funnels into County Governments and School Districts.

Each home owner facing foreclosure will fight hard to survive and keep his house. What will happen, will be the funneling effect of their lack of consumption. They may go into foreclosure, but the lender's pain is far more evident earlier on, than the individual homeowner.

The thing not realized until it’s too late is that government expected receipts are projected out several years. In a declining market, this optimistic view of the future can lead to severe cutbacks in government spending. It's kind of like hitting a brick wall at 60 miles an hour. The wall wasn't there a minute ago.

Our government is the ultimate “Canary in the Coal Mine.” The City of San Diego is a deer in the headlights!

7 comments:

Jim,on the previous post comments section you said that if interest rates go to 16%, the national debt cannot be serviced.

is out debt floating interest rate??? i thought our government debt was long-term with fixed interest rate.

if what you say is the case, which i'm sure it is, than that put a huge bind on the fed, to go in only one direction, print and buy back.

unless of course, the u.s. causes world instability and everyone rushes to u.s. treasuries for safety. a classical u.s. move to cause artificial demand for dollarss, that is make every other currency/country look worse.

The government debt is fix rate interest. The problem is, it isn't going to be paid off any time soon, so it has to be refinanced. It is the refinancing with higher interest rates that will bankrupt the government.

Rates will rise and as they do, the ability of government to pay the interest only (which is all they have done in the past) will fail to be an option.

I know what you mean. I think that some of us including you and me,are probably quite responsible and disciplined. We are stuck as back seat drivers. The only consolation is that the people in the front seat go through the windshield first. Hold on tight!